The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 10,000 utensils at $0.65 each. Arthur sells its utensils wholesale for $0.75 each; the average cost per unit is $0.72, of which $0.15 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?
The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 10,000 utensils at $0.65 each. Arthur sells its utensils wholesale for $0.75 each; the average cost per unit is $0.72, of which $0.15 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?
To calculate the increase in Arthur's operating profits, we need to compare the profit it would make from selling the utensils to Benton with the profit it would make if it continued to sell them at wholesale.
If Arthur were to sell 10,000 utensils at wholesale, it would make a profit of:
Profit per unit = Wholesale price - Average cost per unit Profit per unit = $0.75 - $0.72 = $0.03
Total profit = Profit per unit x Number of units sold Total profit = $0.03 x 10,000 = $300
However, it's important to consider the fixed costs that have already been incurred regardless of whether the utensils are sold. Since Arthur is currently producing well below its full capacity, selling the utensils to Benton would help cover some of the fixed costs and increase overall operating profits.
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